Question

1-Describe job order costing, process costing and activity-based costing. Provide examples of the type of companies that would use these costing methods (i.e., three company examples, one for each type of method).

2-Discuss the differences between relevant costs, opportunity costs and sunk costs. Provide examples with respect to how these costs pertain to incremental analysis.

3-Define a static budget and a flexible budget. Which is more useful for companies and why? How could you use variance analysis in your personal life for budgeting?

Answer 1

Answer for 1)

Job order costing is used when determination of cost for a particular job.It is used when the product or service provided by an entity changes every time.Building construction is a place when job order costing can be used.

Process costing is used when mass production happens at different levels of processing.Petroleum refinement can be a place where process costing can be used.

Activity based costing allocated overheads based on activity.For example if a company have 3 different building and electricity for whole is $10000.Then such electricity charges will be distributed based on no. Of units of electricity used by each department.

Answer for 2)

Relevant costs are avoidable costs which can be avoided if the production process stops.For example direct material costs can be avoided if some production is stopped as it is relevant to that production.

Opportunity costs are costs that is need to be forgone when two alternatives are available.For example a building may be used as factory or given to rent.Now if they choose one,the income that can be gained from other sources will be opportunity cost.

Sunk costs are costs that is already incurred and not recoverable.For example rent of building paid is sunk cost as it is paid and not recoverable.

Answer for 3)

Static budget is fixed budget and doesn't have any probability intention in it.The budget is prepared only at one level of production and it is the only set target that is to be achieved.

Flexible budget is prepared at different level of production i.e at 70% capacity,80% capacity,90% capacity etc.

I think flexible budget is more useful as it considers different level as level of capacity of production may be changed based on outside forces like demand etc and hence the manager will have only budget targets at specific production level but not production targets.

In my real life I can use variance analysis in spending of my income on the particular expenses like food etc and it helps me to find that where I am spending more than intended and control at that area.